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Renewal Partners mentioned in August Edition of BC Business

Is Small Business Bad for B.C.?

Dominated by small, inefficient businesses, the B.C. economy needs for a few more champions.

Coastal Contacts is one example of B.C.’s unique economic advantage: gutsy entrepreneurs like Hardy fuel Canada’s most dynamic small-business sector. However, while Coastal Contacts broke through to the big leagues, such successes are few and far between. In 2009, businesses with fewer than 50 employees provided 57 per cent of B.C.’s private-sector jobs, the highest proportion in Canada, according to B.C. Stats. About 18 per cent of the province’s workers were self-employed, the highest rate in the country. Together, these small companies accounted for about one-third of B.C.’s GDP.

Depending so heavily on small business has its drawbacks. Productivity is linked to things like working conditions and wages, and those improve with economies of scale far beyond the reach of small businesses. Canada’s unimpressive labour productivity – a measure of wealth created per hour worked – has long been a topic of conversation among economists, and B.C. is dragging Canada’s score down, coming in at just below the national average. And we aren’t making any significant advances: a report released by the C.D. Howe Institute in June this year found that between 1985 and 2009 B.C. had the second-lowest labour productivity growth in the country, after Newfoundland.

“This is counter-intuitive to a lot of people,” explains Jock Finlayson, vice-president of policy for the Business Council of B.C., “[but] the larger the enterprise, on average, the higher the output per worker.” He explains that large companies are generally able to invest more in machinery, training and technology to max out the value created in every working hour. “This suggests that an economy that is highly weighted toward small businesses is going to have a fairly low level of productivity,” Finlayson says. “And this is what we see in B.C.”

And the bad news doesn’t end there. Exports and R&D are both crucial factors in a growing, dynamic economy, Finlayson explains, and these too generally suffer with small business size. Only Nova Scotia and PEI have a smaller portion of their GDP derived from exports, according to Statistics Canada, and B.C.’s spending on research and development per capita is below the national average.

There is, however, an upside to having so many small businesses: the ones like Coastal Contacts that do grow quickly can contribute significantly to the economy. A 2008 study by Industry Canada found that while only four per cent of companies in Canada qualified as “hyper-growth firms” between 1993 and 2003, they were responsible for 45 per cent of the net jobs created by continuing companies. So if more of B.C.’s many small businesses could follow the lead of such companies as Coastal Contacts, they could transform B.C.’s economy from laggard to leader.

As Finlayson explains, “the challenge is to have an environment where these rapidly growing small firms will take root and actually grow and reach their potential.” So what’s stopping them?

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Energy Aware Technology's UBC beginnings

The home base of Energy Aware Technology Inc. is a far cry from the Coastal Contacts head office. A team of seven is snuggled into 1,000 square feet of office space on the top floor of an aging Gastown office building. The tiny kitchen is stacked to the ceiling with shipping boxes. A hand drill rests on a square of cardboard in the boardroom. President and CEO Janice Cheam jokes that every room here is a “slash” room: office/storage, boardroom/workshop, and so on.

But the humble office belies the young company’s early promise. Energy Aware makes an elegant palm-sized wireless display that’s designed to promote energy conservation by showing people, in real time, how much power their home is using. The company was named 2009’s most promising startup by the B.C. Technology Industry Association, it has development partnerships with several smart-grid developers and, although it is not yet profitable, it has sold some 5,000 of its gizmos to clients around the world.

Energy Aware was conceived as part of an entrepreneurship course at UBC, and Cheam admits that at first she never intended to turn it into a real company. Instead she applied for jobs at Vancouver’s biggest consulting firms upon graduating in 2006. But her early experiences with Energy Aware kept coming up in the interviews, and after a particularly in-depth three-hour session, she recalls, her interviewer pulled her aside and levelled with her. “When we did our one-on-one, he was like, ‘I don’t think what we can offer you is going to be on par with what you’ve already just experienced.’” It was a classic moment of self-discovery, and Cheam quickly called up her old classmates and convinced them to help build a real company.

These kinds of origin stories happen continually in entrepreneurial B.C., but what happens next presents the real challenge: how to transform that tiny germ of a company into a money-making, job-creating, export-generating international corporation. Energy Aware’s struggles early on make for a good case in point. Cheam faced two problems common to most new entrepreneurs: obscurity and lack of funds.

Energy Aware’s starting funds came from family members, angel investors and a single VC firm, Renewal Partners Co., all of whom together pitched in about $600,000. But raising the money necessary to continue improving the product and court potential clients and partners remains a challenge. It’s not that there isn’t capital to be had in the world; it’s just tough to convince it to come to Vancouver. Hardy and others contacted for this story confirm that even in these days of supposedly mobile capital, investors are likely to put their money close to where they live. Cheam recalls one meeting with a potential American investor: “His question to me, straight up, no apologies: ‘When are you moving your company to California?’”

There are some advantages, however, to being north of the border. Cheam’s reason for staying here comes in the form of a few choice letters: IRAP and SR&ED. The federal government’s Industrial Research Assistance Program provides funding to pay salaries associated with research projects, and its Scientific Research and Experimental Development Tax Incentive Program is a tax credit for money spent on R&D. Energy Aware’s access to those programs ended the conversation about moving the company, Cheam says.

Energy Aware has sold products to utilities in Australia, Finland and North America, but so far only for pilot projects. The company’s goal is to score a system-wide contract with a major utility and outfit millions of homes, instead of thousands. If and when that lucky day comes, the company will explode in size – which will, of course, bring on new problems. Cheam will need engineers familiar with modern smart grids and business-development managers who know the global utility industry. To find that specialized talent, she’ll likely have to recruit internationally, which means lengthy searches, big salaries and struggles with Canada’s immigration system.